The Pakistan Tehreek-i-Insaf (PTI) government is facing grim challenges on the fiscal front. Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, released by the Ministry of Finance on February 3, for the first six months of the current fiscal year, shows that a part of even the defence expenditure is now funded by borrowing.

This is more than a fiscal fiasco; the economic viability and security of the country appears to be at stake. The mindless and costly borrowing has resulted in a 15 percent increase in debt-servicing, with fiscal deficit reaching Rs 1.4 trillion.

The Federal Board of Revenue’s (FBR) claim of an annual growth of 16-20 percent in revenue collection from 2013 to 2018 is now an open secret. The “extraordinary” revenue growth was apparently made up of blocked refunds, advances from big corporate taxpayers, a substantial increase in the number of withholding tax provisions, enhancement in their rates and exorbitant sales tax on petroleum products.

There was a marginal increase in the number of tax return filers. Ishaq Dar, the then finance minister, was not only hiding these facts, but also hoodwinking members of the parliament and citizens and yet he received many waivers from the International Monetary Fund (IMF).

The total collection of the FBR for fiscal year 2019-20 was Rs 3,998 billion after retaining accumulated refunds of over Rs 710 billion. However, the data released by the MoF and used by the IMF in its latest review of April 8, ignored the Rs 710 billion liability. This is despite the fact that FBR officials appearing before the National Assembly’s Standing Committee on Finance and Revenue on September 2, had admitted that actual liability of income tax and sales tax refund as on June 30, was Rs 710 billion (sales tax Rs 142 billion and income tax Rs 568 billion).

For many years, on instructions from top bosses of the FBR, field officers have been denying adjustment of determined refunds against demands. If Shaukat Fayaz Ahmad Tarin, replacing Hammad Azhar as minister for finance and revenue for six months, unless he becomes a member of the National Assembly or Senate, does not stop these malpractices, there will be a damaging impact on businesses facing difficulties in the wake of Covid-19, especially after its third deadlier wave.

Ishaq Dar’s legacy of squeezing the existing taxpayers must end now. It is high time that an audit by the Auditor General of Pakistan is commissioned by Shaukat Tarin to ascertain the quantum of refunds unlawfully withheld and not paid with compensation, where applicable, till today.

Devising a rational policy and revenue mobilisation strategy is the biggest challenge before Shaukat Tarin. On taking charge, he rightly said that his top most priority would be sustainable growth and prosperity for all citizens. Tax revenues will increase with growth and not through higher taxes and withholding provisions.

Devising a rational policy and revenue mobilisation strategy is the biggest challenge before Shaukat Tarin. On taking charge, he rightly said that his top most priority would be sustainable growth and prosperity for all citizens.

The contrary prescription by the IMF - of higher taxes and costly energy - will lead to unemployment and dismal growth. Every political party promises rapid growth and welfare as its main agenda, but when in power fails to deliver the same. The PTI government is only the latest to fail on this account. Since August 2018, it has failed to dismantle the elitist structures that fleece the poor and benefit the rich.

Only through a sustainable growth rate of above 7 percent for at least a decade can we generate the needed two million jobs per year. Without this growth rate we cannot overcome our fiscal deficit, debt retirement and tax-to-GDP ratio problems. We need radical changes like lower tax rates on a broad base, reduction in the exorbitant sales tax rate (it should be 5 percent across the board), bringing corporate tax rate to 20 percent, and simpler compliance procedures as elaborated in Towards Flat, Low-rate, Broad and Predictable Taxes (PRIME Institute).

In the wake of Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”], the federal and provincial governments have shown a lukewarm attitude towards restructuring the country’s tax system to achieve efficiency and to promote economic growth.

Shaukat Tarin must take immediate steps for revamping and restructuring of the entire tax system without which, it is not possible to reduce debt-servicing and further borrowing and attain a growth rate of 7 percent or more.

Tax reforms undertaken to date have mainly been a patchwork. The reform committees and commissions, including the World Bank-funded six-year-long Tax Administration Reforms Project (TARP), miserably failed to achieve voluntary tax compliance. In 2020, the federal government obtained a $400 million loan for Pakistan Raises Revenue (PRR) Project. The total cost of PRR Project is estimated at $1.6 billion, of which counterpart contribution is $1.2 billion and IDA financing $400 million.

The Punjab government also borrowed $304 million from the World Bank for the Punjab Resource Improvement and Digital Effective Program. Like earlier programmes, these are bound to fail. The only viable option for meaningful change is to replace the existing tax systems — federal and provincial — with lower, flat and predictable rates that are simple, pragmatic, growth-oriented and broad-based. With such a countrywide system in place, those who are not in the tax net or who avoid true disclosures would be incentivised to pay their due taxes. This should be coupled with transparent and quality spending of taxpayers’ money for welfare of the society as a whole, inclusive of growth and economic well-being of every citizen.

The provinces must participate in devising national tax policy and collection apparatus as their share under the 7th National Finance (NFC) Award is larger than the federal government. Article 156(2) of the Constitution after the 18th Amendment requires federalized, and not centralized, economic planning. There is a dire need for a new tax model entailing harmonised sales tax on goods and services, uniform rates for agricultural and non-agricultural income and its collection through a single national agency, though the distribution should be strictly as per NFC Award under Article 160 of the Constitution — all governments must participate in retiring debts and eliminating fiscal deficit.

Tax reforms without a fair and efficient tax administration can never be enforceable. For this purpose, a National Tax Agency (NTA) is needed not only to collect taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes; otherwise tax compliance will remain a distant dream.

The existing four-tier tax appellate system has also failed to deliver. It needs to be restructured as suggested in Tax Reforms in Pakistan: Historic & Critical Review (PIDE, 2020).

The government should devise, through a democratic process, a rational and consensual tax policy after taking input from all stakeholders and experts and implement it after securing consensus in the parliament and the provincial assemblies. This alone can help raise the much-needed revenues of at least Rs 8 trillion at the federal and Rs 2 trillion at the provincial levels.

The writers, lawyers and authors, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)